The Influence of Regional Agglomeration Externalities on Efficiency in Norwegian Salmon Aquaculture

This report analyses the factors explaining productivity and efficiency differences across salmon aquaculture farms, with an emphasis on agglomeration externalities. We specify a stochastic frontier production model with agglomeration indexes included in both the frontier production function and the technical inefficiency model. The frontier model is estimated on a rich panel data set with 2,738 observations on 577 farms. Our results confirm the importance of agglomeration externalities for the productivity and technical inefficiency of salmon farms. Both frontier output and technical efficiency increase with increasing regional industry size. There is a negative relationship between overall productivity and regional farm density, suggesting the presence of negative biological congestion externalities. These results have implications for the Norwegian government’s regulation of the industry, since the government, to a large extent, has determined the spatial distribution of salmon production through a licence system.